# HARSHAD SHANTILAL MEHTA v. CUSTODIAN AND OTHERS

- **Citation:** [1998] 3 S.C.R. 389
- **Court:** Supreme Court of India
- **Decided:** 1998-05-13
- **Case number:** Civil Appeal No. 5326of1995
- **Bench:** Sujata V. Manohar, S.P. Kurdukar, D.P. Wadhwa
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/harshad-shantilal-mehta-v-custodian-and-others-16328
- **Pages:** 25

## Headnote

The Special Court (Trial of Offences Relating to Transactions in
Securities) Act, I 992:
Sections I 1(2) and 3(3)-Disbursemen/ of properties r:tached under
Section 3(3)-Liabilities to be paid or discharged under Section JI (2) are
A
B
c
of the person notified-If any person other then the notified person has any
share, right, Ii/le or interest in the attached property on the date of notification
under Section 3(3), right of third party cannot be extinguished-Any D
application of third party has to be decided by the Special Court before
proceeding under Section I I.
Section I I-Disbursement of attached properties-Jn case of properties
of the notified persons already mortgaged/pledged to banks or financial
institutions on the date of attachment-Held, the liabilities mentioned in E
Section I I (2)of the Act which were to be paid from the proceeds of the sale
of the attached property, would only refer to proceeds of the sale of the right,
title and interest of the notified person in the attached property and not the
entire property itself
Section I I (2)(a)-'Tax due'-Meaning-Unascertained and unassessed F
tax which is not legally binding on the assessee not covered by Section I I
(2)(a)-Discharge of tax liability of notified person-Do not include penalty
or interest under Income Tax Act-Remedy of notified person assessed to
penalty or interest would be to approach the tax authorities under the taxing
statute-Income Tax Act, 1961-S. 2(43).
G
Words and phrases-"Tax due"-Meaning of-In the context of the
Special Court (Trial of Offences Relating to Transaction in Securities) Act,
1992.
Section 11(2)(a) & 9-A-Tax liability-When it becomes due-Date of H
389
390
SUPREME COURT REPORTS
[1998] 3 S.C.R.
A distribution-When the Special Court completes the examination of claims
under Section 9-A-lf on this date any liability for the statutory period is
legally assessed and the assessment is final and binding on the notified
persons-Held, that liability will be considered for payment under Section
11(2)(a).
B
The Special Court (Trial of Offences Relating to Transactions in
Securities) Act~ 1992 deals with offences involving amounts of unusual
magnitude procured by brokers from banks and financial institutions. The
Special Court which was set up for a quick prosecution or adjudication of
claims in respect of two notified parties, and the time was approaching for
C the distribution of their assets under Section 11 of the Act which was
attached under Section 3(3) of the Act. In this case there were interpretational
difficulties generated by the casual drafting of the Act and the Special Court
had raised three questions pertaining to distribution of assets under Section
11(2) of the Act.
D
Disposing of the appeal, this Court
HELD : 1.1. Since the property (movable and immovable or both) which
.- -1.
is attached is of the person notified, the liabilities to be paid or discharged
under Section 11(2) of the Special Court (Trial of Offences Relating to
Transaction in Securities) Act, are also liabilities of the person notifiedE whether these liabilities be in respect of payment of revenues, taxes, cesses ·
or rates, or whether they be the liabilities to any bank, financial institution
or mutual fund. Before the Special Court makes any order under Section
• 11(1), the Special Court must be satisfied that the property which· is attached
and is being disposed of, is the property belonging to the notified persons.
F If any person other than the notified person has any share, or any right, title
or interest in the attached property on the date of notification under Section
3, the right of the third party cannot be extinguished. The only right which
the Custodian has, in respect of the right of the third parties in such·
properties, is conferred by Section 4 under which, if the Custodian is satisfied
that any contract or agreement which was entered into by the notified party
G within the "statutory period" in relation to an attached property is fraudulent
or

## Text

_Characters 0–39,992 of 65,479. This is a partial read: ask again with offset=39992 for what follows._

HARSHAD SHANTILAL MEHTA
v.
CUSTODIAN AND OTHERS
MAY 13, 1998
[SUJATA V. MANOHAR, S.P. KURDUKAR AND
D.P. WADHWA, JJ.]
The Special Court (Trial of Offences Relating to Transactions in
Securities) Act, I 992:
Sections I 1(2) and 3(3)-Disbursemen/ of properties r:tached under
Section 3(3)-Liabilities to be paid or discharged under Section JI (2) are
A
B
c
of the person notified-If any person other then the notified person has any
share, right, Ii/le or interest in the attached property on the date of notification
under Section 3(3), right of third party cannot be extinguished-Any D
application of third party has to be decided by the Special Court before
proceeding under Section I I.
Section I I-Disbursement of attached properties-Jn case of properties
of the notified persons already mortgaged/pledged to banks or financial
institutions on the date of attachment-Held, the liabilities mentioned in E
Section I I (2)of the Act which were to be paid from the proceeds of the sale
of the attached property, would only refer to proceeds of the sale of the right,
title and interest of the notified person in the attached property and not the
entire property itself
Section I I (2)(a)-'Tax due'-Meaning-Unascertained and unassessed F
tax which is not legally binding on the assessee not covered by Section I I
(2)(a)-Discharge of tax liability of notified person-Do not include penalty
or interest under Income Tax Act-Remedy of notified person assessed to
penalty or interest would be to approach the tax authorities under the taxing
statute-Income Tax Act, 1961-S. 2(43).
G
Words and phrases-"Tax due"-Meaning of-In the context of the
Special Court (Trial of Offences Relating to Transaction in Securities) Act,
1992.
Section 11(2)(a) & 9-A-Tax liability-When it becomes due-Date of H
389
390
SUPREME COURT REPORTS
[1998] 3 S.C.R.
A distribution-When the Special Court completes the examination of claims
under Section 9-A-lf on this date any liability for the statutory period is
legally assessed and the assessment is final and binding on the notified
persons-Held, that liability will be considered for payment under Section
11(2)(a).
B
The Special Court (Trial of Offences Relating to Transactions in
Securities) Act~ 1992 deals with offences involving amounts of unusual
magnitude procured by brokers from banks and financial institutions. The
Special Court which was set up for a quick prosecution or adjudication of
claims in respect of two notified parties, and the time was approaching for
C the distribution of their assets under Section 11 of the Act which was
attached under Section 3(3) of the Act. In this case there were interpretational
difficulties generated by the casual drafting of the Act and the Special Court
had raised three questions pertaining to distribution of assets under Section
11(2) of the Act.
D
Disposing of the appeal, this Court
HELD : 1.1. Since the property (movable and immovable or both) which
.- -1.
is attached is of the person notified, the liabilities to be paid or discharged
under Section 11(2) of the Special Court (Trial of Offences Relating to
Transaction in Securities) Act, are also liabilities of the person notifiedE whether these liabilities be in respect of payment of revenues, taxes, cesses ·
or rates, or whether they be the liabilities to any bank, financial institution
or mutual fund. Before the Special Court makes any order under Section
• 11(1), the Special Court must be satisfied that the property which· is attached
and is being disposed of, is the property belonging to the notified persons.
F If any person other than the notified person has any share, or any right, title
or interest in the attached property on the date of notification under Section
3, the right of the third party cannot be extinguished. The only right which
the Custodian has, in respect of the right of the third parties in such·
properties, is conferred by Section 4 under which, if the Custodian is satisfied
that any contract or agreement which was entered into by the notified party
G within the "statutory period" in relation to an attached property is fraudulent
or entered into for the purpose of defeating the provisions of the Special
Court Act, he can cancel such contract or agreement. There is no other
provision under the Special Court Act which affects the existing rights of
a third party on the date of attachment, in the property attached. The attached
property also does not vest in the Custodian. In this regard the position of
H a Custodian is different from that of an official liquidator or a company in
H.S. MEHTA v. CUSTODIAN AND ORS.
391
winding up. Had the Act provided of the extinguishment of any subsisting A
~ ii
rights of other persons in the attached property, the Act could well have been
considered as arbitrary or unconstitutional. (400-D-Hl
1.2. Directions for disposal under Section 11(1) can be given only after
the Special Court has satisfied itself that the property under attachment is
the property which belongs to notified person. The directions for disposal B
can be in respect of the right, title and interest of the notified person in the
attached property. If, therefore, any application is filed before the Special
Court by a third party claiming the property so attached and/or for releasing
the right, title and interest of a third party in the property from attachment,
the Special Court will have to decide the application before proceeding under C
Section 11. [401-A-B)
C.B. Gautam v. Union of India, (1993) I SCC 78; Hitesh Shanti/al
Mehta v. Union of India, (1992) 3 Born. C.R. 716 and B.0.1. Finance Ltd. v.
Custodian, (1997) IO SCC 488, relied on.
2. If in the property :'belonging to" a notified person, another person
has a share or interest, that share or interest is not extinguished. Of course,
D
if the interest of the notified person in the property is not a severable
interest, the entire property may be attached. But the proceeds from which
distribution will be made under Section 11(2) can only be the proceeds in E
relation to the right, title and interest of the notified person in that property.
The interest of a third party in the attached property can not be sold or
distributed to discharge the liabilities of the notified person. This would also
be the position when the property is already mortgaged or pledged on the date
of attachment to a bank or any third party. This, however, subject to the right
of the Custodian under Section 4 to set· aside the transaction of mortgage F
,
"\.
or pledge. Unless the Custodian exercises his power under Section 4, the
right acquired by a third party in the attached property prior to attachment
does not get extinguished nor does the property vest in the Custodian whether
free from encumbrances or otherwise. The ownership of the property remains
as it was. (403-C-El
G
3. The words "taxes due" occur in Section 11(2)(a) dealing with
distribution of property. At this stage the taxes "due" have to be actually paid
;.
out. Therefore, the phrase "taxts due" cannot refer merely to a liability
created by the charging section to pay the tax under the relevant law. It must
refer to an ascertained liability for payment of taxes quantified in accordance H
~
392
SUPREME COURT REPORTS
[1998) 3 S.C.R.
A· with law. Taxes which are not legally assessed or assessments which have
.....
not become final and binding on the assessee, are not covered under Section
•
-11(2)(a) because unless it is an ascertained and quantified liability,
disbursement cannot be made. In the context of Section 11(2), therefore, "the
taxes due" refer to "taxes as finally assessed". (405-C-DJ
•
B
State of Rajasthan v. Ghasilal, (1965) 2 SCR 805; Associated Cement
Co. Ltd. v. Commercial Tax Officer, (1981) 48 STC 466; Chatturam v. CIT,
(1947) 15 ITR 302; Whitney v. IRC, (1926) AC 37; Kalwa Devaduttam v.
)'
Union of India, (1963) 49 ITR 165; Doorga Prasad v. Secy. of State, 13 ITR
285 and Raymond Synthetics Ltd. v. Union of India, (1992] 2 SCC 255, relied
c on.
Black's Dictionary, p.499; Jowitt's Dictionary of English Law, Vol.I.
2nd Edn; 669; Wharton's Law Lexicon, 14th End., p.365, referred to.
4. As the Special court is empowered to examine all transactions in
D
securities during the period 1.4.1991to6.6.1992, as also all claims relating
to the property attached, the Special Court will also.have to examine the tax
liability of the notified person arising during the period 1.4.1991 to 6.6.1992.
.,j
As the purpose of the special Court Act, inter alia, is as far as practicable,
to safeguard the funds too which the banks and financial institutions may
be entitled, and to ensure that these funds are not done away with, there are
E provisions.for attachment, ascertainment of claims and distribution of funds.
However, before the liabilities of a notified person to banks and financial
institutions can be discharged, Section l 1(2)(a) requires the tax liability of
the notified person to be paid. In this context the tax liability can properly
be construed as tax liability of the notified person arising out of transactions
F
in securities during the "statutory period" of 1.4.1991 to 6.6.1992. If any
income tax is required to be paid in connection with the income accruing to
7 .
a notified person in respect of transactions in security during the "statutory
period" that liability will have to be paid before the funds are made available
to the banks and financial institutions. Similarly, in respect of any property
which is attached, if any rates or taxes are payable for the "statutory period"
G those rates and taxes will have to be paid before the proceeds of the property
are distributed to banks and financial institutions. In the same manner, the
liabilities to banks and financial institutions in Section 11(2)(b) are also
,
liabilities pertaining to the statutory period. Every kind of tax liability of the
.'(
notified person for any other period is not covered by Section 11(2)(a),
H although the liability may continue to be the liability of the notified person.
)--
I
H.S. MEHTA v. CUSTODIAN AND ORS.
393
Such tax liability may be discharged either under the directions of the A
""'>.-
Special Court under Section l 1(2)(c), or the taxing authority may recover
the same from any subsequently acquired property of a notified person or in
any other manner from the notified person in accordance with law. The
priority, however, which is given under Section 11(2)(a) to such tax liability
only covers such liability for the period 1.4.1991 to 6.6.1992.
B
(405-G-H; 406-A-EJ
Tejkumar Balakrishan Ruia v. A.K. Menon, (1997) 9 SCC 123, relied
•,
on.
5.1. Tax liability under Section 11(2)(a) refers to such liability for the
period 1.4.1991 to 6.6.1992. It would not be correct to hold that the liabilities c
arising during this period should also be finally assessed before 6.6.1992
(the date of the Act) or the date of notification. It must refer to the date of
distribution. The date of distribution arrives when the Special Court completes
the examination of claims under Section 9-A. If on that date, any tax liability
for the statutory period is legally assessed, and the assessment is final and
binding on the notified person, that liability will be considered for payment D
under Section 11(2)(a). (406-H; 407-A-B]
> "
5.2. The Special Court cannot sit in appeal for the assessment of taxes
by the tax authorities. There is undoubtedly no question of reopening of tax
assessments before the Special Court. There is also no provision under the
Special Court Act for proof of debts as in insolvency. The provisions in the E
Special Court Act for examination of claims are under Section 9-A. A claim
in respect of tax assessed, therefore, cannot be reopended by the Special
Court. The liability of the notified person to pay the tax will have to be
determined under the machinery provided by the relevant tax law. The extent
of liability, therefore, can not be examined by the Special Court.[410-C-DJ F
5.3. But the Special Court can decide how much of that liability will
be discharged out of the funds in the hands of the Custodian. This is because
the tax liability of a notified person having priority under Section 11(2)(a)
is only tax liability pertaining to the "statutory period". Secondly payment
in full may not be made by the Special Court depending upon various G
circumstances. The Special Court can, for this purpose, examine whether
there is any fraud, collusion or miscarriage of justice in assessment
}-
proceedings. The assessee who is before the Special Court, is a person liable
to be charged with an offence relating to transactions in securities. He, may
not, in these circumstances, explain transaction before the Income tax
authorities, in case his position is prejudicially affected in defending criminal H
~
394
SUPREME COURT REPORTS
[1998] 3 S.C.R.
A charges. Then, on account of his property being attached, he may not be in
a position to deposit the tax assessed or file appeals or further proet!edings
;.-
.,
under the relevant tax law which he could have otherwise done. Where the
assessment is based on proper material and pertains to the "statutory period",
the Special Court may not reduce the tax claimed and pay it out in full. But,
B
if, the assessment is a "best judgment" assessment, the Special Court may
examine whether, for example, the income which is so assessed to tax bears
comparison to the amounts attached by the Custodian, or whether the tax so
assessed are grossly disproportionate to the properties of the assessee in the
hands of the Custodian, applying the Wednesbury principle of proportionality.
•
The Special Court may in these cases, scale down the tax liability to be paid
,
c out of the funds in the hands of the Custodian. [410-E-H; 411-A)
5.4. Although the liability of the assessee for the balance tax would
subsist, and the taxing authorities would be entitled to realise the remaining
liability from the assessee, the same will not be paid in priority over the
claims of everybody else under Section 11(2)(a). If the Special Court so
D decides, it may direct payment of balance liability under Section 11(2)(c).
Otherwise the taxing authorities may recover the same from any other
subsequently acquired property of the assessee or in any other manner in
-1.
accordance with law. Such scaling down, however, should be done only in
,,,
serious cases of miscarriage of justice, fraud or collusion, or where tax
E
assessed is so disproportionately high in relation to the funds in hands of
the Custodian as to require scaling down in the interest of the claims of the
banks and financial institutions and to further the purpose of the Act. The
Special Court have strong reasons for doing so. In fact, the Income Tax
authorities have also accepted that exorbitant tax demands can be ignored,
applying the Wednesbury Principles. [411-B-D)
F
Tejkumar Balakrishna Ruia v. A.K. Menon, [1997) 9 SCC 123; State
of Punjab v. Rattan Singh, [1964) 5 SCR 1098; S. V Kondeaskar v. VM
Deshpande, [1972) l SCC 438 and C/Tv. A.K. Menon, [1995) 5 SCC 200,
relied on.
G
Lahore High Court (Bench of three Judges) in Governor-General Jn
ti
Council v. Sargodha Trading Co. Ltd., 11 /TR 368; Jn re Calvert, [1899) 2
QBD 145 and Ravi Paint Colour and Varnish Works Ltd. v. Federation of
Pakistan, [1955) 27 ITR 475, referred to.
~
6.1. Neither penalty nor interest can be considered as tax under Section
H 11(2)(a). Provisions for imposition of penalty and interest are distinct from
...
\
H.S. MEHTA v. CUSTODIAN AND ORS.
395
the provisions for imposition of tax. [411-F-G]
A
6.2. Since the liabilities covered under Section l 1(2)(a) are only
liabilities arising during the period 1.4.1991 to 6.6.1992, and do not cover
penalty and interest, the question whether the Special Court can absolve a
notified person from imposition of penalty or interest after the date of the
notification does not really arise. In any case, interest or penalty for any B
action or default after the date of notification, are not covered by the Act.
However, a taxing statute is a code in itself for imposition of tax, penalty or
interest. The remedy of a notified person who is assessed to penalty or
interest, after the notified period, would be to move the appropriate authority
under the taxing statute in that connection. If it is open to.him under the
relevant taxing statute to contend that he was unable to pay his taxes on C
account of the attachment of all his properties under the Special Court Act,
and that there is a valid reason why penalty or interest should not be imposed
upon him after the date of notification, the authorities concerned under the
taxing statute can take notice of these circumstances in accordance with law
for the purpose of deciding whether penalty or interest can be imposed on
the notified person. The Special Court is required to consider this question
only from the point of view of distributing any part of the surplus assets in
the hands of the Custodian after the discharge of liabilities under Sections
11(2)(a) and l1(2)(b). The Special Court has full discretion under Section
l 1(2)(c) to decide whether such claim for penalty or interest should be paid
out of any surplus funds in the hands of the Custodian. (412-B-E)
7. In view of the interpretation put on Section 11 and Section 3(3), the
challenge to the constitutional validity of Section 11 read with Section 3(3)
does not survive. If, according to the bank or financial institutions, any of
the properties attached belongs to the banks or financial institution concerned,
D'
E
it is open to the bank or financial institution to file a claim before the Special
Court in accordance with law. Obviously, until such a claim is determined, F
the property attached cannot be sold or distributed under Section 11.
[413-D]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5326of1995
Etc.
From the Judgment and Order dated 20.2.95 of the Special Court, Bombay
in M.A. No. 107of1993.
G
Ram Jethmalani, Atul Setelwad, Harish N. Salve, F. S. Nariman, Arun
Jaitely, Dipankar Gupta, Dr. V. Gauri Shankar, S.D. Parekh, Bhimrao Naik, S.B.
Jaisinghani, Mahesh Jethmalani, Ms. Lata Krishnamurti, A. Subba Rao, A.T. H
396
SUPREME COURT REPORTS
[1998] 3 S.C.R.
A Rao, Rajiv Kapur, Sanjay Kapur, Ms. Shubhra Kapur, Subhash Sharma, Ms.
Nina Gupta, Neeraj Sharma, Ms. Vaishali Deshpande, Ms. Arpita Roy
Choudhary, Sanjay Katyal, Vineet Kumar, Tushar K. Cooper, S. Rajappa, C.
Radhakishna, B.K. Prasad, S.N. Terdol, S.K. Dwivedi, A.K. Sharma, Ms. Vijay
Lakshmi Menon, Ms. Anuradha Dutt, B.V. Desai, N.K. Niraj, P.J. Mehta and
B Janakalyan Das for the Appearing parties.
The Judgment of the Court was delivered by
MRS. SUJATA V. MANO HAR, J. The Special Court (Trial of Offenders
Relating Transactions in Securities) Act, 1992 is a special Act with its own
special problems. The offences it deals with involve amounts of unusual
C magnitude procured by brokers from banks and financial institutions.
Unfortunately, the proceedings before the Special Court, which was set up for
a quick prosecution or adjudication of claims have been trapped in unusual
legal and interpretational difficulties generated by the casual drafting of the
Act that leaves much to the skills and good sense of the courts. The present
· D appeals before us relate to the interpretation of Section 11 of the Act.
Civil Appeal No. 5225 of 1995 is filed by the Custodian appointed under
the provisions of the Special Court (Trial of Offences Relating to Transactions
in Securities) Act, 1992 against a judgment and order of the Special Court
Judge dated 20.2.1995. The appeal is filed by the Custodian pursuant to
E directions contained in the impugned judgment itself. The other appeals have
been filed by various notified persons under the Special Court (Trial of
Offences Relating to Transactions in Securities) Act, 1992 (hereinafter referred
to as the 'Special Court Act') from the same judgment and order of the Special
Court Judge. A writ petition challenging the constitutional validity of Section
11 of the Special Court Act pending in the Delhi High Court has also been
F transferred to this Court for consideration along with these appeals, as common
questions of law arise. All these appeals along with the transferred case have
been heard together. We have also heard various intervenors in these appeals.
The Special Court has observed that it has been functioning since June
1992. In respect of two notified parties, namely, the Harshad Mehta Group and
· G Fairgrowth Financial Services Ltd., the time is approaching for distribution of
their assets under Section 11 of the Special Court Act, 1992. In view of the
different possible interpretations of the provisions of Section 11, the Special
Court has raised certain questions of law. After hearing all concerned parties,
the Special Court has answered these questions in the impugned judgment,
somewhat in the fashion of an Originating Summons. The Custodian has
H raised certain additional questions which arise in interpreting and implementing
\
H.S.MEHTAv.CUSTODJAN AND ORS. [SUJATA V. MANOHAR,J.]
397
Section 11 of the Special Court Act. The questions raised by the Special Court A
are as follows:
"I. Whether the priority created by section 11 of the Special Court
(Trial of Offences Relating to Transactions in Securities) Act, 1992 is
only in respect of amounts due prior to the date of Notification and/
or whether the priority would also apply to amounts due after the date B
of the Notification.
2. Whether the phrase 'taxes' as used in Section 11 of the Special
Court (Trial of Offences Relating to Transactions in Securities) Act,
1992 can only mean amounts due as and by way of taxes or whether
it would also include penalties and interest, if any.
C
3. Whether penalty and/or interest can be levied on or charged to
Notified Parties after the date of Notification."
To appreciate the points at issue, it is necessary to look briefly at the
provisions of the Special Court Act. The Statement of Objects and Reasons D
relating to the Act states, "In the course of the investigations by the Reserve
)•....
Bank of India, large scale irregularities and malpractices were noticed in
transactions in both the Government and other securities, indulged in by
some brokers in collusion with the employees of various banks and financial
institutions. The said irregularities and malpractices led to the diversion of
funds from banks and financial institutions to the individual accounts of E
certain brokers, (2) To deal with the situation and in particular to ensure
speedy recovery of the huge amount involved, to punish the guilty and
restore confidence in and maintain the basic integrity and credibility of the
banks and financial institutions, the Special (Trial of Offences Relating to
Transactions in Securities) Ordinance, 1992, was promulgated on 6th June, F
1992. The Ordinance provides for the establishment of a Special Court with
a sitting Judge of a High Court for speedy trial of offences relating to
transactions in securities and disposal of properties attached_ It also provides
for appointment of one or more custodians for attaching the property of the
offenders with a view to prevent diversion of such properties by the offenders."
The Ordinance was replaced by the Act.
G
Under Section 3 of the Special Court Act sub-sections (1), (2), (3) and
( 4) are as follows :
"3. Appointment and functions of Custodian-( I) The Central
Government may appoint one or more Custodian as it may deem fit H
A
B
c
D
398
SUPREME COURT REPORTS
(1998] 3 S.C.R.
for the purposes of th.is Act.
(2) The Custodian may, on being satisfied on information received that
~
any person has been involved in any offence relating to transactions
W
in securities after the 1st day of April, 1991 and on and before 6th
June 1992, notify the name of such person in the Official Gazette.
(3) Notwithstanding anything contained in the Code and any other
law for the time being in force, on and from the date of notification
under sub-section (2), any property, movable or immovable, or both,
belonging to any person notified under that sub-section shall stand
attached simultaneously with the issue of the notification.
(4) The property attached under sub-section (3) shall be dealt with by
the Custodian in such manner as the Special Court may direct.
(5) .............. , ........ , ....... , ........................ "
The Custodian has, therefore, the power to notify the names of persons
involved in any offence relating to transactions in securities after the 1st day
of April, 1991 and on or before 6th of June, 1992. On such notification all
properties of the notified person stand attached. Under Section 4, the Custodian
is given the power, if he is satisfied that any contract or agreement entered
into at any time after 1st of April, 1991 and on or before 6th of June, 1992
E in relation to any property of the person notified has been entered into
fraudulently or to defeat the provisions of this Act, to cancel such contract
or agreement. On such cancellation the property shall stand attached. Both
Sections 3 and 4, therefore, deal with the Custodian's powers relating to
transactions in securities entered into during a very specific period, namely,
F
1st of April, 1991 and on or before 6th of June, 1992 (hereinafter referred to
as the statutory period).
Under Sections 7 and 8 the jurisdiction of the Special Court in respect
of prosecution of offences is confined to offences referred to in Section 3(2)
i.e. during the statutory period. Section 9-A which has been introduced by
G the Amending Act 24 of 1994, deals with jurisdiction, powers, authority and
procedure of the Special Court in civil matters. Under sub-section (1) it is
provided as follows :-
"( 1) On and from the commencement of the Special Court (Trial of
Offences Relating to Transactions in Securities) Amendment Act,
H
1994, the Special Court shall exercise all such jurisdiction powers and
·-
H.S. MEHTA v. CUSTODIAN AND ORS. [SUJA TA V. MANOHAR, J.]
399
authority as were exercisable, immediately before such commencement, A
by any civil court in relation to any matter or claim -
(a) relating to any property attached under sub-section (3) or Sec.
3· ,
(b) arising out of transactions in securities entered into after the B
!st day of April 1991, and on or before the 6th day of June, 1992 in
which a person notified under sub-section (2) of Sec.3 is involved as
a party, broker, intermediary or in other manner.
(2) .................. .
(3) .................. .
c
(4) .................. .
(5) ................... "
Jurisdiction of the Special Court in civil matters is, therefore, in respect D
of any matter or claim relating to any property which is attached under
Section 3(2), or any matter or claim arising out of transactions in securities
entered into during the "statutory period".
Under Section 9-B the jurisdiction of the Special Court in arbitration
matters is also with reference to those matters or claims which are covered E
by Section 9-A (!).
Therefore, the jurisdiction of the Special Court in civil as well as criminal
matters is in respect of transactions during the statutory period of I st of
April, 1991 to 6th of June, 1992; and in relation to the properties attached, of
a notified person. The entire operation of the said Act, therefore, revolves F
around the transactions in securities during this statutory period.
Section 11 deals with discharge of liabilities and distribution of the
property attached. It provides as follows :-
" 11. Discharge of liabilities-( I) Notwithstanding anything contained G
in the Code and any other law for the time being in force, the Special
Court may make such order as it may deem fit directing the Custodian
for the disposal of the property under attachment.
(2) The following liabilities shall be paid or discharged in full, as far
as may be, in the order as under :-
H
A
B
400
SUPREME COURT REPORTS
(1998) 3 S.C.R.
(a) all revenues, taxes, cesses and rates due from the persons notified
by the Custodian under sub-section (2) of Sec.3 to the Central
Government or any State Government or any local authority
(b) all amounts due from the person so notified by the Custodian to
any bank or financial institution or mutual fund; and
( c) any other liability as may be specified by the Special Court from
time to time."
This Section obviously deals with disbursement of properties attached
under Section 3(3). Since the property (movable or immovable or both) which
C is attached is of the person notified, the liabilities which are to be paid or
discharged under Section 11(2) are also liabilities of the person notified -
whether these liabilities be in respect of payment of revenues, taxes, cesses
or rates, or whether they be the liabilities to any bank, financial institution or
mutual fund.
D
Before the Special Court makes any order under Section 11 (I) the
Special Court must be satisfied that the property which is attached and is
•
being disposed of, is the property belonging to the notified person. If any
,,...c_
person other than the notified person has any share, or any right, title or
interest in the attached property on the date of notification under Section 3,
E that right of a third party cannot be extinguished. There is no provision in
the Special Court Act which extinguishes the right, title and interest of a third
party in any property which is attached as a consequence of a notification
under Section 3. The only right which the Custodian has, in respect of the'
rights of third· parties in such properties, is conferred by Section 4 under
which, if the Custodian is satisfied that any contract or agreement which was
F entered into by the notified party within the "statutory period" in relation to
an attached property, is fraudulent or entered into for the purpose of defeating
the provisions of the Special Court Act, he can cancel such contract or
agreement. There is no other provision under the Special Court Act which
affects the existing rights of a third party on the date of attachment, in the
property attached. The attached property also does not vest in the Custodian.
G In this regard, the position of a Custodian is different from that of an official
liquidator of a company in winding up. Had the Act provided for the
extinguishment of any subsisting rights of other persons in the attached
property, the Act could well have been considered as arbitrary or
unconstitutional (Vide C.B. Gautam v. Union of India and Ors., [1993] I SCC
H 78 at page 105 to 110).
H.S.MEHTAv.CUSTODIANANDORS.[SUJATAV.MANOHAR,J.)
401
The directions, therefore, for disposal under Section I !(I) can be given A
only after the Special Court has satisfied itself that the property under
attachment is the property which belongs to the notified person. The directions
for disposal can only be in respect of the right, title and interest of the notified
person in the attached property. If, therefore, any application is filed before
the Special Court by a third party claiming the property so attached and/or B
for releasing the right, title and interest of a third party in the property from
attachment, the Special Court will have to decide the application before
proceeding under Section 11.
It has also been submitted before us by one of the notified parties
(Dhanraj Mills v. Custodian) that properties belonging to notified persons C
which have no nexus with the transactions in securities ofthe notified person
during the "statutory period", also cannot be attached
under Section 3 .
. Reliance is placed on the decision of the Bombay High Court in the case of
Hitesh Shanti/al Metha v. Union of India & Anr. (1992) 3 Born. C.R. 716 (to
which one of us was a party) in this connection. Our attention is drawn to
the following passage in the High Court's judgment (at page 719), "If the D
person ....... approaches theSpecial Court and makes out, for example, a case
that the property which is attached has no nexus of any sort with the illegal
dealings in securities belonging to banks and financial institutions during the
relevant period and/or that there are no claims or liabilities which have to be
satisfied by attachment and sale of such property, in our view, the Special E
court would have the power to direct the Custodian to release such property
from attachment". Hence a property not having any nexus with the illegal
dealings in securities can be relea~ed from attachment by the Special Court
in an appropriate case.
The question of distribution of attached property under Section 11 (2) F
has to be considered thereafter. Before going into the questions raised in that
connection, one must examine whether Section 11(2) lays down any priorities.
Although it was contended before us by some of the appellants that Section
11 (2) does not lay down any priorities, the language of Section 11 (2) is quite
clear. The words, "in order as under" in Section 11 (2) lay down the properties
for distribution. Jn fact, it has been so held by this Court while interpreting G
Section 11 in the case of B.O.I. Finance Ltd. v. Custodian & Ors., [1997] IO
SCC 488 at page 497. Referring to Section 11(2) of the Act, this Court has said
that sub-section (2) of Section 11 provides for the priorities in which the
liabilities of the notified person are to be discharged from out of the attached
properties. Considering that the Act has been passed because of the diversion H
402
SUPREME COURT REPORTS
(1998] 3 S.C.R .
. A of funds from the banks and financial institutions to the individual accounts
of certain brokers, the implication of Section 11 (2) (b) clearly is, that after the
discharge of the liabilities under Section I 1(2)(a), the amounts which are paid
to the banks would ]Jrobably be those funds which were diverted from the
banks by reason of malpractice in the security transactions. However, before
the amounts can be paid to banks or financial institutions under Section
B l 1(2)(b) the liabilities under Section l 1(2)(a) are required to be discharged.
The Special Court has raised three questions pertaining to distribution
under Section 11(2). We would, however, like to expand the three questions
in order to bring out the points at issue which have been argued before us.
c The questions can be reframed as follows :
(!) What is meant by revenues, taxes, cesses and rates due? Does
the word "due" refer merely to the liability to pay such taxes etc.,
or does it refer to a liability which has crystalised into a legally
ascertained sum immediately payable?
D
(2)
Do the taxes (in clause (a) of Section 11(2)) refer only to taxes
relating to a specific period or to all taxes due from the notified
person?
(3)
At what point of time should the taxes have become due?
E
(4)
Does the Special Court have any discretion relating to the extent
of payments to be made under Section 11(2)(a) from out of the
attached funds/property?
(5)
Whether taxes include penalty or interest?
(6)
Whether the Special Court has the power to absolve a notified
F
person from payment of penalty or interest for a period
subsequent to the date of his notification under Section 3. In the
alternative, is a notified person liable to payment of penalty or
interest arising from his inability to pay taxes after his
notification?
G
The Custodian has raised certain further questions. We propose to
consider one such question which has a bearing on the questions which have
been framed by the Special Court. The question is whether in the case of
mortgaged/pledged properties of the notified persons already mortagaged/
pledged to the banks or financial institutions on the date of attachment, the
H words of Section 3 (3) "any property movable or immovable or both belonging
I
,, ....
f
.
. ..,·
H.S. MEHTA v. CUSTODIAN AND ORS. [SUJA TA V. MANO HAR, J.]
403
to any person notified" would refer only to the right, title or interest of the A
notified person in the mortgaged/pledged property and not the entire property
itself. If so, the liabilities mentioned in Section 11 (2) which are to be paid from
the proceeds of the sale of the attached property, would only refer to proceeds
of the. sale of the right, title and interest of the notified person in the attached
property.
The last question can be answered first. As stated above, Section 3(3)
clearly provides that the properties attached are properties which belong to
the person notified. The words "belong to" have a reference only to the right,
B
title and interest of the notified person in that property. If in the property
"belonging to" a notified person, another person has a share or interest, that C
share or interest is not extinguished. Of course, if the interest of the notified
person in the property is not a severable interest, the entire property may be
attached. But the proceeds from which distribution will be made under Section
11 (2) can only be the proceeds in relation to the right, title and interest of the
notified person in that property. The interest of a third party in the attached
property cannot be sold or distributed to discharge the liabilities of the D
notified person. This would also be the position when the property is already
mortgaged or pledged on the date of attachment to a bank or to any third
party. This, however, is subject to the right of the Custodian under Section
4 to set aside the transaction of mortgage or pledge. Unless the Custodian
exercises his power under Section 4, the right acquired by a third party in the E
attached property prior to attachment does not get extinguished nor does the
property vest in the Custodian whether free from encumbrances or otherwise.
The ownership of the property remains as it was.
Question No. I
The first question on which the arguments have been advanced, relates
to the meaning of the phrase "tax due" used in Section I 1(2)(a). Black's Law
Dictionary at page 499 defines the word 'due', inter alia, as, "owing; payable;
justly owed ............... Owed or owing as distinguished from payable. A debt
F
is often said to be due from a person where he is the party owing it, or
primarily bound to pay, whether the time for payment has or has not G
arrived .......... .The word 'due' always imports a fixed and settled obligation or
liability, but with reference to the time for its payment there is considerable
i.
ambiguity in the use of the term, the precise signification being determined
in each case from the context." (underlining ours) Jowitt's Dictionary of
English Law Vol. I, 2nd Edn. at page 669 defines 'due' as, "anything owing, H
404
SUPREME COURT REPORTS
[1998] 3 S.C.R.
A that which one contracts to pay or perform t.o another. .......... As applied to
a sum of money, 'due' means either that it is owing or that it is payable; in
other words, it may mean that the debt is payable at once or at a future time.
It is a question of construction which of these two meanings the word 'due'
has in a given case".
B
Wharton's Law Lexicon, 14th Edn. at page 365 defines 'due' as anything
owing. It has the following comment, "It should be observed that a debt is
said to be due the instant that it has existence as a debt; it may be payable
at a future time".
J
Our attention has been drawn to Section 530(1)(a) of the Companies Act
C where the language used in "taxes, cesses and rates due and payable" and
Section 61(1)(a) of the Provincial Insolvency Act, 1920 which refers to all
debts due to the Crown. In the State of Rajasthan & Ors. v. Ghasilal, [1965]
2 SCR 805, this Court considered the provisions of the Rajasthan Sales Tax
Act, 1955. It observed, that Section 3 which is the charging section of the
D Rajasthan Sales Tax Act, read with Section I, makes tax payable i.e. creates
a liability to pay the tax. That is the normal function of a charging section
in a taxing statute. But till the tax payable is ascertained by the Assessing
_,.-< •
Autho~ity under Section IO or by the assessee under Section 7(2), no tax can
be said to be due.